Lesson 6 of 8 · All lessons in this module
- Cognitive errors versus emotional biasesVideo lesson
- Belief perseverance I: conservatism and confirmation
- Belief perseverance II: representativeness, illusion of control and hindsight
- Information-processing biases: anchoring, mental accounting, framing and availabilityVideo lesson
- Emotional biases I: loss aversion and overconfidenceVideo lesson
- Emotional biases II: self-control, status quo, endowment and regret aversion
- Integrated case: a multi-bias file with 'least likely' and 'not shown' items
- Behavioural finance and market anomalies
Lesson 6 of 8 · 14 min
Emotional biases II: self-control, status quo, endowment and regret aversion
Self-control bias trades long-term goals for short-term pleasure, while status quo, endowment and regret aversion all lead investors to keep what they have, but for different reasons: inertia, extra value placed on what is owned, or fear of regretting an action.
In short
- Self-control bias: failing to pursue long-term goals because of short-term satisfaction; linked to hyperbolic discounting (preferring small payoffs now to larger ones later). Leads to under-saving (then taking too much risk to catch up) and excessive borrowing. Fix: written plan, budget, strategic asset allocation.
- Status quo bias: doing nothing when change is warranted, out of inertia rather than conscious choice. Fix: education; quantify the benefits of diversification.
- Endowment bias: valuing an asset more because you own it; the minimum selling price exceeds the maximum buying price. Fix: 'If you had the cash, how would you invest it?' and 'Would you buy it today at this price?'
- Regret-aversion bias: avoiding decisions for fear they turn out badly; regret over an action taken hurts more than over one not taken. Leads to excessive caution and herding.
- Status quo, endowment and regret aversion share an outcome (existing positions kept), but only status quo is inertia; the other two involve conscious, possibly mistaken, choices.
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